© 2006 McGraw-Hill Ryerson Ltd. Managerial Accounting and the Business Environment Chapter One

© 2006 McGraw-Hill Ryerson Ltd. Learning Objectives 1.Identify the major differences and similarities between financial and managerial accounting. 2.Understand the role of management accountants in an organization. 3.Understand the basic concepts underlying Just- In-Time (JIT), Total Quality Management (TQM), Process Reengineering, and the Theory of Constraints (TOC). 4.Explain the importance of upholding ethical standards. After studying this chapter, you should be able to:

© 2006 McGraw-Hill Ryerson Ltd. Work of Management Planning Controlling Directing and Motivating

© 2006 McGraw-Hill Ryerson Ltd. Planning Identify alternatives. Select alternative that does the best job of furthering organization’s objectives. Develop budgets to guide progress toward the selected alternative.

© 2006 McGraw-Hill Ryerson Ltd. Directing and Motivating Directing and motivating involves managing day- to-day activities to keep the organization running smoothly.  Employee work assignments.  Routine problem solving.  Conflict resolution.  Effective communications.

© 2006 McGraw-Hill Ryerson Ltd. Controlling The control function ensures that plans are being followed. Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.

© 2006 McGraw-Hill Ryerson Ltd. Planning and Control Cycle Decision Making Formulating long- and short-term plans (Planning) Measuring performance (Controlling) Implementing plans (Directing and Motivating) Comparing actual to planned performance (Controlling) Begin

© 2006 McGraw-Hill Ryerson Ltd. Comparison of Financial and Managerial Accounting

© 2006 McGraw-Hill Ryerson Ltd. Organizational Structure Decentralization is the delegation of decision- making authority throughout an organization.

© 2006 McGraw-Hill Ryerson Ltd. Line and Staff Relationships Line positions are directly related to achievement of the basic objectives of an organization.  Example: Production supervisors in a manufacturing plant. Staff positions support and assist line positions.  Example: Cost accountants in the manufacturing plant.

© 2006 McGraw-Hill Ryerson Ltd. The Controller A member of the top management team responsible for:  Providing timely and relevant data to support planning and control activities.  Preparing financial statements for external users.

© 2006 McGraw-Hill Ryerson Ltd. The Professional Management Accountant Three types of professional accountants work as management accountants in Canada:  CGA  CA  CMA

© 2006 McGraw-Hill Ryerson Ltd. Just-in-time production Total quality management Process reengineering Theory of constraints International competition E-commerce Just-in-time production Total quality management Process reengineering Theory of constraints International competition E-commerce Business environment changes in the past twenty years The Changing Business Environment

© 2006 McGraw-Hill Ryerson Ltd. Complete products just in time to ship customers. Complete parts just in time for assembly into products. Schedule production. Receive materials just in time for production. Receive customer orders. Just-in-Time (JIT)

© 2006 McGraw-Hill Ryerson Ltd. Flexible workforce Reduced setup time Zero production defects JIT Consequences Improved plant layout JIT purchasing Fewer, but more ultra reliable suppliers Frequent JIT deliveries in small lots Defect-free supplier deliveries JIT purchasing Fewer, but more ultra reliable suppliers Frequent JIT deliveries in small lots Defect-free supplier deliveries

© 2006 McGraw-Hill Ryerson Ltd. More rapid response to customer orders Freed-up funds Reduced inventory costs Greater customer satisfaction Higher quality products Benefits of JIT Increased throughput

© 2006 McGraw-Hill Ryerson Ltd. is Total Quality Management (TQM) Continuous Improvement TQM improves productivity by encouraging the use of fact and analysis for decision making and if properly implemented, avoids counter-productive organizational infighting. Systematic problem solving using tools such as benchmarking

© 2006 McGraw-Hill Ryerson Ltd. Process Reengineering The process is redesigned to eliminate all non-value-added activities Every step in the business process must be justified. A business process is diagrammed in detail. Anticipated results: Process is simplified Process is completed in less time Costs are reduced Opportunities for errors are reduced Anticipated results: Process is simplified Process is completed in less time Costs are reduced Opportunities for errors are reduced

© 2006 McGraw-Hill Ryerson Ltd. Process Reengineering versus TQM Process Reengineering Radically overhauls existing processes. Likely to be imposed from above and to use outside consultants. Total Quality Management Tweaks existing processes to realize gradual improvements. Uses a team approach involving people who work directly in the process.

© 2006 McGraw-Hill Ryerson Ltd. A constraint (also called a bottleneck) is anything that prevents you from getting more of what you want. The constraint in a system is determined by the step that has the smallest capacity Theory of Constraints

© 2006 McGraw-Hill Ryerson Ltd. 4. Recognize that the weakest link is no longer so 1. Identify the weakest link 2. Allow the weakest link to set the tempo 3. Focus on improving the weakest link Only actions that strengthen the weakest link in the “chain” improve the process. Theory of Constraints

© 2006 McGraw-Hill Ryerson Ltd. International Competition Competition has become worldwide in most industries Fewer tariffs, quotas, and other barriers to free trade Improvements in global transportation systems An excellent management accounting system is needed to succeed in today’s competitive global marketplace Increasing sophistication in international markets

© 2006 McGraw-Hill Ryerson Ltd. E-Commerce In recent years, many dot.com businesses failed that might have benefited from the application of managerial accounting tools:  Cost concepts (Chapter 2)  Cost estimation (Chapter 5)  Cost-volume-profit (Chapter 6)  Activity-based costing (Chapter 8)  Budgeting (Chapter 9)  Decision-making (Chapter 13)  Capital budgeting (Chapter 14)

© 2006 McGraw-Hill Ryerson Ltd. Professional Ethics for Management Accountants The U.S. Institute of Management Accountant’s (IMA) Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management have two major parts offering guidelines for:  Ethical behaviour.  Resolution for an ethical conflict.

© 2006 McGraw-Hill Ryerson Ltd. Competence Follow applicable laws, regulations and standards Maintain professional competence Prepare complete and clear reports after appropriate analysis IMA Guidelines for Ethical Behaviour

© 2006 McGraw-Hill Ryerson Ltd. Confidentiality Do not disclose confidential information unless legally obligated to do so Ensure that subordinates do not disclose confidential information Do not use confidential information for personal advantage IMA Guidelines for Ethical Behaviour

© 2006 McGraw-Hill Ryerson Ltd. Avoid conflicts of interest and advise others of potential conflicts Recognize and communicate personal and professional limitations Do not subvert organization’s legitimate objectives Integrity IMA Guidelines for Ethical Behaviour

© 2006 McGraw-Hill Ryerson Ltd. Integrity Avoid activities that could affect your ability to perform duties Communicate unfavorable as well as favorable information Refrain from activities that could discredit the profession Refuse gifts or favors that might influence behaviour IMA Guidelines for Ethical Behaviour

© 2006 McGraw-Hill Ryerson Ltd. Communicate information fairly and objectively Disclose all information that might be useful to management Objectivity IMA Guidelines for Ethical Behaviour

© 2006 McGraw-Hill Ryerson Ltd. Follow established policies. For unresolved ethical conflicts:  Discuss the conflict with immediate superior or next highest uninvolved manager.  If immediate superior is the CEO, consider the board of directors or the audit committee. IMA Guidelines for Resolution of an Ethical Conflict

© 2006 McGraw-Hill Ryerson Ltd. Follow established policies. For unresolved ethical conflicts:  Except where legally prescribed, maintain confidentiality.  Clarify issues in a confidential discussion with an objective advisor.  Consult an attorney as to legal obligations.  The last resort is to resign. IMA Guidelines for Resolution of an Ethical Conflict

© 2006 McGraw-Hill Ryerson Ltd. Abandoning ethical standards in business would lead to a lower quality of life with less desirable goods and services at higher prices Why Have Ethical Standards? Without ethical standards in business, the economy, and all of us who depend on it for jobs, goods, and services, would suffer Ethical standards in business are essential for a smooth functioning advanced market economy

© 2006 McGraw-Hill Ryerson Ltd. Codes of Conduct on the International Level In addition to competence, objectivity, independence, and confidentiality, the IFAC’s code deals with the accountant’s ethical responsibilities in: Taxes Fees and commissions Advertising and solicitation Handling of monies Cross-border activities. In addition to competence, objectivity, independence, and confidentiality, the IFAC’s code deals with the accountant’s ethical responsibilities in: Taxes Fees and commissions Advertising and solicitation Handling of monies Cross-border activities. The Guidelines on Ethics for Professional Accountants, issued by the International Federation of Accountants (IFAC), govern the activities of professional accountants worldwide

© 2006 McGraw-Hill Ryerson Ltd. End of Chapter 1